The volume of money turnover per minute is almost impossible to calculate within a specific city, what about the scale of the state or the world? The flow of finance unrestrainedly cuts from coin houses to mattresses of frugal citizens. How does the state maintain the necessary balance of funds in the country and what tools does it use? The classic monetary policy will be discussed in this article, and we will consider all its main aspects.
A bit about macroeconomics
To understand the mechanism of monetary monetary policy, it is worth mentioning briefly about macroeconomics itself - this is the scientific branch of the economy, where the behavior of the market, supply and demand, as well as other economic phenomena at a particular time stage is studied in detail.
Firstly, without its foundations it is impossible to plan and predict the behavior of markets of a certain period.
Secondly, macroeconomics incorporates the basic concepts in the field of government and economy management, and also shows the interactions between them, the population and the reaction to change in the external environment in relation to the state. It is important to remember that macroeconomics is a domestic market, and not the practice of various states. Of course, all examples of this article will be based on examples of monetary policy of the Russian Federation.
State regulatory measures
In order to maintain balance in the country's economy, the government uses certain regulatory measures. This effect is rapidly and immediately on several factors:
- Regulated resources, finance and production. On a statewide scale, of course.
- The delegation of work from the federal to the regional hierarchy.
The main factors of the state’s work are:
- Inadmissibility of dominance of the public sector over the private. Otherwise, the private sector will collapse.
- Stimulation of industries that are just ignored by "private traders".
- The unity of state credit, tax and financial policies to stimulate the development and growth of the economy.
- Crisis management. Prevention and mild mitigation by choosing the right tools.
There are both direct methods of maintaining economic stability, and indirect. Direct give immediate results in view of their specificity. These are prohibitions, and permissions, and restrictions, all kinds of regulations. Indirect suggest gentle stimulation, where the result manifests itself after a certain time. These methods include the financial and monetary system. They stimulate the adoption of certain market decisions in one way or another. One of the ways of such regulation is monetary monetary policy, which we will discuss in more detail later.
Fiscal policy
The main addition to the topic of this article is the fiscal policy of the state. It goes hand in hand with the monetary policy of the state, their interaction is reflected in the current economic situation of our country. Some students confuse these concepts, so once and for all we will make it clear that fiscal policy is a state policy aimed at reducing negative fluctuations in the economy, as well as building pillars for a stable economic system in the short term.
The instruments here, in contrast to monetary policy in the economy, are money in the form of state revenues and expenditures. These are taxes, transfers and spending on public procurement. This lever has several functions:
- Stabilization between the value of aggregate demand and the country's GDP.
- Macroeconomic equilibrium, where all state resources are effectively involved.
- As a result, pricing stability.
Fiscal and monetary policies have a restraining and stimulating property. But it uses different tools. We give them for comparison.
The restraining property - the use is supposed at the moment of “heating” of the economy, then measures are taken to increase taxes and reduce government spending. Constraining policies are often used to reduce inflation.
Stimulating property back to the previous one. In this case, the state actively makes public purchases, reduces taxes, increases transfers, if possible. In most cases, this leads to an increase in output in the country.
Monetary policy
We will reveal the essence of this state instrument in more detail. Monetary policy is more flexible than fiscal, as it directly affects the monetary turnover in the country. However, it is also the most fragile, because incorrect forecasts and actions can lead to inflation or deflation, which is less common.
Monetary policy of the bank (it is monetary) is such a policy that affects the amount of money in the market to ensure price stability, employment and growth in production. Its author is the Central Bank and is responsible for its implementation. Monetary monetary policy is an integral part of the whole unity of state economic policy. There are two types:
- Tough. It supports a certain amount of money in the economy.
- Flexible. It regulates the refinancing interest rate, from which the rest of the economic blocks and private banks are repelled.
As in the case of fiscal, the monetary policy of the state has a number of instruments of restraining and stimulating orientation. The restraint focuses on the fight against inflation in the form of reduced business activity, in particular, it is used during the economic “boom”. Interest rates are rising. Incentive is activated when economic turnovers decrease and the country needs “stimulating therapy” in the form of growth in business activity against unemployment, an increase in money supply, interest rates fall.
How did it come about?
The monetary policy of the Central Bank originated in the first half of the nineteenth century in the historical homeland of macroeconomics, in the USA. Then John Taylor in his writings used the term monetary policy of the country to equalize the economy of the United States and Great Britain.
In Russia of the pre-revolutionary era, the expression "monetary policy" was found back in the 1880s on the pages of scientific publications and articles on the issue of paper money. Already in the first courses of economic and state directions in universities, the work of this science is described in detail. Economists of that time are beginning to actively discuss this phenomenon, and after 20 years, the concept of "monetary policy of the government" is used by the authorities.
Monetary policy is characterized as a way of "easy transformation" of cash flow with the help of flexibility and efficiency, as well as its use together with the fiscal policy of the state. This result is obtained because the tool gently, rather than aggressively, inclines banks to pursue a particular policy. Including the influence of the Central Bank on commercial, the ability to regulate their activities. This helps reduce the consequences after crises, restrain price growth, as well as build further economic growth.
It will be useful here to mention the term refinancing of commercial banks.
Refinancing of commercial banks implies the issuance by the Central Bank of cash to other credit institutions. Of course, the disbursement of funds is carried out “at interest” or under a number of conditions. The Central Bank is also involved in the recounting of securities in the portfolios of commercial banks. Most often these are bills. Previously, this was the most basic method of monetary policy of the Central Bank.
Goals and Features
The objectives of monetary policy are divided into strategic (generalized, more enlarged within the framework of one country) and tactical (with a vector of a specific direction).
Strategic: economic growth of the state, price stabilization in all sectors, a stable tax system that can be overpowered by the working population of the country.
Tactical: includes money supply, loan interest, as well as the national currency rate.
The features of the monetary policy of the Central Bank are its tools, namely:
- Refinancing of commercial banks.
- Buying and selling securities and foreign currencies in the open market.
- Change in standard in required reserves.
What are the benefits?
Different experts, due to the subjectivity of opinions, respectively, distinguish different advantages, but among them the most basic ones can be distinguished.
This is a period of time between the awareness of the economic situation that has arisen in the state, and the moment of decision-making in order to improve it. Since the decision to buy and sell government securities is made immediately by the Central Bank, there are no problems with their resale to the public and other banks. Of course, it is worth considering that such papers in other developed countries have high reliability and minimal risks when manipulating monetary policy instruments.
Stimulating monetary policy (compared with the same fiscal) is due to a decrease in the interest rate, which does not lead to crowding out investments, but to stimulating them.
The multiplicative effect of influence on the economy always accompanies both fiscal and monetary policies. The first multiplier is banking. Expands deposits, increases money supply. And the second is the growth of autonomous costs, where after reducing the rate increases the value of the total output.
What about the flaws?
Inflation is the main minus. Moreover, they are available both in the short term and in the long term, as money supply is growing. Adherents of the Keynesian school believe that it is advisable to use such a policy only at the time of the inflationary gap in the economy. If a recession occurs, then it is more efficient to “connect” a stimulating fiscal policy.
The next drawback of monetary policy is a significant external lag. It is characterized by the period from the moment of taking measures to the moment of the appearance of the first positive results in the economy. For example, if you sell government securities at the time of “overheating,” then the result may return at the time of recession, then this situation will only get worse.
The dissonance between the policy of "expensive money" and "cheap money." For example, the policy of “cheap money” may give additional reserves to commercial credit organizations, nevertheless, there will be no guarantees that an increase in credit volume for the population will follow. Individuals and legal entities may be wary of obtaining loans due to negative outlook on the future. Concern about the future of the economy will be in the air. Such sentiments will further aggravate the situation, despite stimulating tools.
Double standards of interest rate and money supply. The central bank can regulate either the rate or the money supply in the country, since both indicators determine the equilibrium of the money market. Therefore, if the Central Bank uses the main method of monetary policy to support the stability of money supply, then control over the rate will be lost, and as a result, it will decrease, regardless of the desire of the Central Bank.
In Russian practice
The economy of our country from the beginning of the 21st century until the first major crisis in 2008 had a certain model of economic development. It represented a greater degree of focus on increasing aggregate demand by increasing exports. In this situation, the Central Bank weakened the ruble, with confidence in a stable dollar exchange rate, to buy foreign assets in foreign currency, increasing its foreign exchange reserves, and maintain a high foreign exchange rate to stimulate exporters. However, as a result, there was an increase in the money supply when the bank exchanged foreign assets for rubles.
Now the monetary policy of the Russian government is based primarily on the political situation in the external arena. Despite the fact that this factor is macroeconomic, environmental factors are strongly involved in the situation. Sanctions measures have strengthened the “sinking” points within the state economy and have contributed to the development of innovative programs that help conserve many resources and use them with even greater benefit. The main objectives of monetary policy are determined in connection with the level of development at which the state is located. For the period from September 2013 to August 2015, the key rate of the Central Bank increased by almost 2 times. This indicates a complication of the economic situation as a whole. Now the Bank of Russia priority task is to coordinate the parameters of specific monetary policy operations and the operation of payment systems, as well as markets. In the future, monetary policy is considering the transition to a single auction system in refinancing operations, using all kinds of assets. Nevertheless, how the economy will manifest itself in the future depends not only on the Central Bank, but also on the instruments that they and the state will choose at one time or another, since it is obvious how fragile and mobile the system is.
Brief thesis
Having opened the topic, you can understand that its scale cannot be fit into several pages, so experts compose whole manuals and books, carefully studying each mechanism of such a complex tool as monetary policy. Its complexity lies in the flexible consequences that can manifest themselves after the required period, exacerbating the situation.
In fact, monetary policy appeared much earlier than this concept was revealed, since the areas of macroeconomics in the form of science were not immediately presented. However, the principle of the money supply in the state was respected even in Ancient Rome and other first civilizations, since the main principle here is the logic - if you do not calculate the funds and distribute in accordance with the needs of the state, you can quickly empty the treasury and the country will plunge into chaos.
Monetary credit policy is applicable to any state, therefore, all countries of the world apply to it using one or another mechanism. The problem of such activity is reflected in the choice of mechanism. Therefore, it is necessary to take into account the factors of time, the interaction of all sectors (the improvement in some does not always extend to others), and also remember that monetary policy works more effectively in a team with fiscal. A competent combination of all the tools will allow the state not only to stabilize the economy, but also to develop it in the future, as smoothly as possible smoothing out the negative “angles” in the form of crises.